E*Trade crosses line into black

Online stockbroker E*Trade Australia is trading profitably for the first time, reflecting shifts in strategy by online brokers forced to extract profits from a static pool of clients.

E*Trade chief executive Michael Deleray highlighted the trend yesterday, pointing out that the company would achieve a small operating profit this financial year, although its annual result would be dominated by a big share issue to major shareholder ANZ Bank.

"For the June financial year, because of these abnormal issues of shares, you'll see a bottom-line loss, but that has no effect on our cash position or our operating profitability," Mr Deleray said.

The reason for the loss is that in return for an alliance that has provided it with customers, E*Trade will issue ANZ with shares to increase the latter's stake from 10 to 35 per cent.

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That trade-off is part of a pattern that has made four of the top five online brokers the online brands of the big four banks.

The situation has arisen because of stagnation in the number of active online accounts since the dot-com collapse.

"The number of people who hold accounts has continued to rise, but what's holding the industry back is that you've got a lot of people not trading at all, or not as often," said Mark Johnston, online broking analyst at AC Nielsen.consult.

Figures from AC Nielsen.consult show that while the total number of online share traders grew by more than 100,000 between June and December last year, the number of active accounts barely moved.

Similarly, E*Trade warned shareholders yesterday that ANZ would probably miss another performance hurdle, due in September, of providing two-thirds of E*Trade customers.

That would have earned ANZ a further 5 per cent stake. E*Trade shares fell two cents to 57 cents yesterday.

The broader slowdown drove US player Charles Schwab out of the local market after only a year of business, and exposed the weakness of business models reliant on "transactional" business such as brokerage fees.

"For E*Trade, the vast majority is transactional business, but we are diversifying that stream," said Mr Deleray.

By contrast, the biggest non-bank player, TD Waterhouse, is aggressively expanding revenue from other business, especially because it does not have easy access to bank customers.

It now gets 30 per cent of revenue from asset-based sources, such as fees from managed-fund sales, cash balances and margin lending.

"Obviously banks have an advantage because they have such a large untapped customer base," said TD Waterhouse head of marketing Peter Duvall.

"But because we're not tainted by links with a bank, we can develop a brand position that stands alone."

TD Waterhouse is now No. 4 online broker by value, with a market share of 12 per cent. Commonwealth Securities leads with about 40 per cent, and E*Trade and Westpac have about 15 per cent each.

"The nature of the business is that in boom times people are trading more often, but you've got to build a business model that can cope with the quieter times," Mr Duvall said.

For example, 5 per cent of managed funds are currently being sold online; Mr Duvall expects that to grow to 15 or 20 per cent within three years.

Banks have also been improving their regular online banking services. A survey by MISC Australia found that the number of registered online banking users had grown from 1.4 million in June 2000 to 4.6 million in December.

The big growth area is in existing online customers, who are using the service more actively, partly since banks acted on customer concerns that their websites were too slow.

"The banks have spent a lot of time revamping services and increasing speed, and that's reflected in figures showing activity rising," said MISC marketing manager Tony Kendall.